Growth strategy backed by research

By John Hood | Jul 24, 2013

 


RALEIGH — When you hear politicians utter the phrase “economists say,” be skeptical. Social scientists don’t speak with one voice. There are many differences of opinion, reflecting differences in assumptions and methodology.

As liberals criticized the economic policies of the General Assembly this year, they often resorted to the “economists say” tactic. Few of these commentators were, in fact, economists or had evidently read the relevant literature.

I’m not an economist, either. But I employ economists specializing in state policy — and we have done the required readings. That’s why we believe the legislature’s fiscal and regulatory policies are the right medicine for North Carolina’s economic maladies.

While researching my 2012 book Our Best Foot Forward, my colleagues and I gathered together every recent academic study we could find that tested the relationship between state fiscal or regulatory policy and economic measures such as income growth and job creation. At present our database contains 146 articles. Here are the main findings:

• Most studies of overall state taxes found that they were negatively associated with economic growth. That is, 28 studies found that higher taxes were linked to weaker growth, while 11 studies yielded mixed or statistically insignificant findings and only one study found that higher taxes were linked to stronger growth.

• With regard to specific state tax policies, there were negative associations with growth in 61 percent of the studies examining income tax burdens, 67 percent of the studies examining marginal tax rates, and 68 percent of the studies examining taxes on business or corporate income.

• Liberals say that North Carolina would be better served by a strategy that maintains or increases the current tax burden to fund education, infrastructure, or other programs. This idea may be plausible but it lacks strong empirical support. Of the 13 studies testing the relationship between total state spending and economic growth, only one found it was positive. Seven studies found that higher spending was associated with weaker growth and the other five were inconclusive.

• Of the 33 studies that tested the link between education expenditures and growth, 14 studies found a positive association, 11 studies were inconclusive, and eight studies had a negative association (the economic benefits of additional education spending were lower than the economic costs of the taxes required). Of the 24 studies examining infrastructure spending, a somewhat-higher plurality (46 percent) found positive results, but most studies still found inconclusive or negative relationships.

Finally, there were 23 articles that looked at regulation and 20 articles that studied indexes of economic freedom encompassing both fiscal and regulatory policy. Scholars found a positive economic effect for less regulation 74 percent of the time and for economic freedom 75 percent of the time.

There remains plenty of room for debate. Liberals could claim that the minority of studies supporting their view were better designed, for example. But they can’t simply claim that “economists say” liberals are correct about promoting economic growth. That’s incorrect.



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Hood is president of the John Locke Foundation and author of Our Best Foot Forward: An Investment Strategy for North Carolina’s Economic Recovery. It is available at JohnLockeStore.com.